Introduction
The doctrine of pure financial loss is a significant development in the American and European tort laws. At the same time, the development has been confusing with controversies over the definition and restricting principles governing pure economic loss in different states. The pure economic loss has been a fascinating topic of discussion among law scholars developing into vast literature regarding the notions that entail a case of pure financial loss. The 21st century demands better approaches to exercising the recovery of pure economic laws while courts are still reluctant to allow adjustments to individual claims for pure economic recovery. Significant issues raised include the extent of tort liability imposed on an individual without straining their economic activities or financial status and special rules that can be made in particular claims of pure economic loss. This paper critically discusses why courts have been reluctant to allow individual claims of pure financial loss regarding decided cases according to the rules of pure economic loss.
Definition of Terms
Economic loss is a complex doctrine with different rules and laws governing property and physical or personal injuries recovery. It includes two categories of financial loss where the first classification comprises consequential economic referring to a financial loss involving damage to property or physical injury. For instance, a motor accident victim can suffer consequential economic loss from the injuries incurred, hindering the individual’s income. The victim is liable for compensation if the court establishes a breach in duty of care. The same principle applies to pure economic loss. However, pure financial loss is a monetary loss involving money that does not include loss of life or destruction of property. Pure economic loss recovery works under tort laws stating that damages are irrecoverable in the absence of physical injuries or property destruction. Courts applied the no-recovery rule to individual claims based on various arguments regarding financial consequences across numerous entities. The following discussion critically explains theories from the no-recovery rule and approaches where exceptional rules may apply according to the court’s considerations.
The Floodgates Theory
The floodgates argument is one of the significant reasons the courts are reluctant to recover the pure economic loss. The theory comprises three arguments, each with a distinct explanation regarding the recovery of pure financial loss. The first argument suggests that permitting the compensation claims of financial loss in various cases would lead to unleashing a series of overwhelming actions to the court. For instance, hundreds of people will have financial losses if a defendant’s negligence causes a huge public commotion or damage, such as the closure of a busy motorway. If all victims decide to sue the defendant, it would be a chaotic process where the court might not be able to deal with all claims. An example is a catastrophic event such as the Exxon Valdez oil spill in the United States waters. The oil spill covered and wide area spreading to over 1300 miles in the sea’s coastline. Although the captain was acquitted and fined for negligence, the victims of the oil spillage could not be compensated due to their vast numbers.
If all victims claimed compensation, the claims could amount to billions of dollars. Consequently, the court would find assessing each claim challenging and offering proper compensation since the victims were affected differently. At the same time, it would result in unending claims due to future side effects and other people taking advantage of the catastrophe for financial gains. The court justifies the case due to a ripple effect with an irreconcilable size of victims that makes it difficult to recover the financial loss, although the incident resulted from negligence.
Secondly, the floodgates theory argues that claiming liability burdens the defendant by treating the person as an economic enterprise. The argument is based on the assumption that everyone has a degree of negligence, and claiming compensation for financial losses would lead to suing everybody. Apart from suing everyone, people might take advantage and claim liability out of proportion and degree of actual negligence. Further, the theory suggests that predicting relational economic claims is challenging when faced with damaging the property of a primary victim since the property could have considerable interests from secondary victims who can take advantage of the situation. Therefore, the courts needed to restrict the recovery of pure financial losses to protect an individual’s wealth and financial well-being. Finally, the third floodgate argument states that pure economic loss is a modern attempt to increase tort liability and has to be restricted. Pure economic rules must not have exceptions that may reverse regulations, leading to many tort liabilities. Therefore, floodgates must be controlled to avoid crushing liability and increase current tort liability.
Human Values
Courts are reluctant to recover the pure economic loss on the argument that human life is valuable and cannot be treated on the same level as tangible wealth or finances. The law protects human dignity first before physical property and money. Every aspect of society, such as physical property, privacy, and wealth, is essential and needs protection. However, human life ranks first, and laws must give greater value by imposing different laws that govern life, property, and finances.
Reasonable Foreseeability of Harm
The argument suggests that foreseeing pure economic losses is more complex than standard losses leading to a continuous series of liability claims. Economic losses can be recovered if the court establishes a duty of care between two parties. According to the principle, the duty of care demands that one must take reasonable care in avoiding actions that may lead to damages or injury to a neighbor. However, if the action does not foresee possible injuries, the defendant is not liable to compensate the claimant since it would lead to an extended series of claims. The Spartan Steel and Alloys Limited vs. Martin & Co (Contractors) Ltd [1973] is an example of a reasonable foreseeability case. In this case, the defendant, Martin, and workers from the company dug a road outside the claimant’s factory. Due to negligence, the workers cut the electricity supply to the factory by damaging an electric cable.
The factory suffered financial losses resulting in less production in the duration that power was disconnected, accrued physical damages involving destruction of metal and production furnaces, and profit losses from the damaged metals. The steel company claimed compensation for the three damages, whereas the court only allowed compensation for two claims. According to the court, the claimant suffered losses because of a halt in production caused by a power disconnection that did not physically damage the property. The defendant could not foresee that the workers would cut the electric cable leading to delayed production and profit losses. Thus, the losses were purely economic without an actionable claim, and demanding compensation was beyond reasonable cause. Further, the holding liability could lead to unending claims due to the nature of the financial losses. Since the first and second claims were consequential economic losses. The claimant received compensation for physical damages accrued and the destruction of tools and materials on site.
The Theory of Proximity and Special Relationships
Another reason for the court’s reluctance to recover pure financial loss is establishing relationships that warrant a duty of care. The reasonable feasibility argument is insufficient to impose care duties because the person suffering from a financial loss might extend negligence liability to the unacceptable breadth that can strain economic activity. Thus, in addition to reasonably foreseeable harm, parties need to have a special relationship or ‘relationship of proximity’ for negligence liability. Proximity refers to the closeness of a defendant and claimant, which might hinder reasonable foreseeability. The Bryan v Maloney case is an example of a case decided by the principle of proximity. Under the law of negligence, the case questions whether a house builder owes a duty of care to avoid harm to the subsequent owner through exercising foreseeable damage such as collapsing the building.
The foreseeable harm considered in this case is property damage due to construction defects or the depreciating value of the property. Although the case held liability against the builder, such instances can lead to taking advantage of contractors’ services since the case does not consider the duration the house has remained standing and previous owners’ remarks regarding the building. The same is observed in the case of Hill v Chief Constable of West Yorkshire Police (1989). The claimant Mrs. Hill was a mother to a deceased victim resulting from a Yorkshire ripper. The defendant is the West Yorkshire Police, who are sued for negligence against failing to detain the ripper who had claimed 13 lives and attempted eight murders. The claimant argued that her daughter would be alive if the police had detained the ripper sooner.
Thus, the court found the defendant not liable because they could not prevent a criminal on the run from committing other murders. Consequently, the claimant is among many other victims, and claiming liability could lead to more claims from the numerous victims of the ripper. Although the cases relate, the builder was found liable because of the buyer seller contractual relationship, while the Yorkshire police were not liable because the claimant and defendant did not have any relationship owing to the duty of care.
Conclusion
Pure financial loss is a controversial subject that requires more explanation and principles that give a universal definition under tort laws. Although the current tort liability challenges the court decisions over exceptions in recovering pure economic loss, the court has viable arguments that warrant contemplation regarding individual claims. The first argument, the floodgates theory, suggests that individual claims can become overwhelming if not controlled by the pure economic loss rule of non-recovery. Secondly, civilians might take advantage of negligent cases to extort others into financial strain. Thirdly, the floodgates theory argues that modern tort laws use the pure economic loss to expand tort liability to reverse the rule into numerous tort laws that are unreasonable.
The court argues that the no-recovery rule of financial loss values human life more than material wealth. Therefore, there must be a distinction between recovery for wealth and claims due to physical injury, defining human integrity. Special rules are made in the foreseeability and proximity doctrine of pure economic loss. Although courts have been reluctant to make exemptions, the two principles of pure economic loss allow claimant liability by considering contractual relationships and duty of care.
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